It’s Time to Generate 2020 1099s

Posted on January 6, 2021 by Russ

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)
  • Where you would normally have to send a 1099 but you made payment by a credit or debit card

Otherwise, you need to send a Form 1099 to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your accounting software (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

This year will be the first year we’ll be using the new Form 1099-NEC to report nonemployee compensation instead of reporting this on Form 1099-MISC. Form 1099-NECs have a filing deadline of February 1, 2021 (for reporting 2020 nonemployee compensation). Form 1099-MISCs are used for all other 1099 reporting except interest, dividends, capital gains, etc. Payments of rent, royalties, advertising, crop insurance proceeds, substitute payments in lieu of dividends, attorney proceeds, other income (including gambling winnings not reporteable on a Form W-2G), and nonqualified deferred compensation are just some of the items reported on a Form 1099-MISC.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file Form 1099-MISC with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing might be easier than electronic filing.

IMPORTANT: The IRS is not sending Form 1099-NECs to state tax agencies. Thus, if you have a state filing requirement for your Forms 1099-NEC, you must separately file this with your state tax agency.

If you wish to file paper 1099s, you must order the forms from the IRS. The forms cannot be downloaded off the Internet. Make sure you also order Form 1096 from the IRS. This is a cover page used when submitting information returns (such as 1099s) to the IRS. WARNING: It is taking the IRS months to fill these orders. We ordered our paper 1099s in October; we have yet to receive them. It is likely too late to order them from the IRS and meet the February 1st deadline. Most tax professionals have software that can file 1099s directly with the IRS and state tax agencies; there are also services you can find that will do this for you.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-NEC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement (issuing form 1099-MISC).

Remember, the deadline for submitting 1099-NECs for “Nonemployee Compensation” (e.g. independent contractors) to the IRS is now at the end of January (though we get an extra day this year, because the 31st falls on a weekend): Those 1099s must be filed by Monday, February 1st.

Here are the deadlines for 2020 information returns:

  • Monday, February 1st: Deadline for mailing most 1099s to recipients (postmark deadline);
  • Monday, February 1st: Deadline for submitting 1099-NECs for Nonemployee Compensation to IRS;
  • Monday, March 1st: Deadline for filing other paper 1099s with the IRS (postmark deadline);
  • Monday, March 15th: Deadline for mailing and filing Form 1042-S; and
  • Thursday, April 1st: Deadline for filing other 1099s electronically with the IRS.

Remember, if you are going to mail 1099s to the IRS send them certified mail, return receipt requested so that you have proof of the filing.

Also note that most 1099s must be mailed to recipients. Mail means the postal service, not email. The main exception to this is if the recipient has agreed in writing to receiving the 1099 electronically. I consider this the IRS’s means of trying to keep the Post Office in business.

Posted in Information Returns, IRS | Tagged | Comments Off on It’s Time to Generate 2020 1099s

It’s Time to Start Your 2021 Mileage Log

Posted on January 2, 2021 by Russ


I’m going to start the new year with a couple reposts of essential information. Yes, you do need to keep a mileage log:

Monday will be the first business day of the new year for many. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log (or use a smart phone app–with periodic sending of the information to yourself to prove that the log is contemporaneous).

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log or must be able to prove your smart phone log is contemporaneous.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 98,235). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car. It’s also a good idea to take a picture of the odometer and email that picture to yourself. This will give you a time-stamp showing you accurately noted your beginning mileage.

Here’s the other things you should do:

On the cover of your log, write “2021 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/4 90315-90350 Office-Acme Products (1234 Main St, Las Vegas)-Office, Discuss requirements for preparing tax return, year-end journal entries.

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.56/mile, the 35 miles in this hypothetical trip would be worth a deduction of $20. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

That said, if you backup (or transfer) your phone app on a regular basis, and can then print out those backups, that should work. The regular backups should have identical historical information; the information can then be printed and will function as a written mileage log. I do need to point out that the Tax Court has not specifically looked at mileage logs maintained on a phone. A written mileage log (pen and paper) will be accepted; a phone app with backups should be accepted.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year? There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

4. Can I use actual expenses? Yes. You would need to record all of your expenses for your car: gas, oil, maintenance, repairs, insurance, registration, lease fees (or interest and depreciation), etc., and the deduction is figured by taking the sum of your expenses and multiplying by the percentage use of your car for business (business mileage to total mileage driven). Note that once you start using actual expenses for your car, you generally must continue with actual expenses for the life of the car. Be careful if you (or your family) have multiple vehicles. You will need to separate out your expenses by vehicle.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.



Posted in IRS | Comments Off on It’s Time to Start Your 2021 Mileage Log

The 2020 Tax Offender of the Year

Posted on December 31, 2020 by Russ

Many are called; few are chosen. It’s time once again for that most prestigious of prestigious year-end awards, the Tax Offender of the Year. It takes more than cheating on your taxes; you need to really cheat or do a series of Bozo-like actions. Every year I hope that there are no worthy candidates; as usual, there are plenty.

The United States Congress get a nomination. “The compromise deal that passed for Covid relief could have been done a lot sooner,” the nominator wrote. And she’s absolutely right. But this reminds me of a joke I remember from Get Smart! When asked how long it would take for an appropriation bill for Control to pass, the answer is two months; when asked how long it would take for an emergency appropriation bill to pass, the answer is three months.

The California Department of Tax and Fee Administration (CDTFA) received a nomination. Consider if you sold items through Amazon.com, and you had two sales to California residents in 2014-2016. The CDTFA is coming after you for back sales taxes, penalties, and interest because your products were possibly warehoused in an Amazon warehouse in California. There are many court cases on this, and even the Los Angeles Times–usually a proponent of additional taxes in California–thinks that the CDTFA is nuts. But Congress and the CDTFA didn’t even make the top three.

Finishing in third place was Winfred Fields. Mr. Fields is enjoying a 109-month stay at ClubFed for a brazen tax fraud scheme. Mr. Fields specialized in preparing returns for workers in oil exploration in the Gulf of Mexico. They were paid by US companies, and Mr. Fields filed returns noting that per tax treaties with the United Kingdom, Spain, or New Zealand these workers’ pay was exempt from US taxation. They weren’t, but the IRS processed the returns. He also required the tax refunds to be deposited in his bank account (a violation of Circular 230, the regulations that tax professionals fall under), so he could take his fee off the top. He received $3,097,974 of illicit refunds and kept $1,302,271 for himself.

Coming in second place are Stein Agee & Corey Agee of the Atlanta area. The Agees developed syndicated conservation easements (SCE), and sold those to high-income individuals. For every dollar you contributed to one of their partnerships, you got a $4 tax deduction. If someone came to me with this as a possible investment, I would immediately think there’s a problem. A fundamental rule of taxation is you can only deduct what you pay for, and it’s hard for me to envision how you can get a (say) $40,000 deduction for investing $10,000. But I digress…

We’re not talking about a small tax fraud here. Per the Department of Justice press release, more than $1.2 billion of fraudulent deductions were taken; the Agees received more than $1.7 million in commissions. Stein and Corey Agee both pleaded guilty to one count of conspiracy to defraud the United States; they’re looking at up to five years at ClubFed plus probable monetary penalties.

And, yes, $1.2 billion of fraud is only second place.

In 1970, a company called Universal Computer Systems (UCS) was formed. It began as a regional data processing service bureau, and expanded in the 1980s, mainly providing computer services to automobile dealers. The company was successful, and expanded to have offices not only in the United States but in several other countries.

In 2006, UCS merged with Reynolds and Reynolds, another automobile dealer computer service company. The merger was valued at about $2.8 billion. Robert Brockman, who was CEO of UCS became CEO of the combined company (which took the Reynolds and Reynolds name). Their current products include dealer management systems for inventory, accounting, contracts, and logistics. It remains a successful business.

Mr. Brockman allegedly began having foreign entities to help shelter his wealth. There is nothing wrong with this, provided you appropriately disclose the entities and pay your US taxes based on the Internal Revenue Code. You likely can figure out where this is headed….

Mr. Brockman’s entities, which included trusts and companies in Bermuda, the British Virgin Islands, and Nevis (part of Saint Kitts and Nevis, two islands in the Caribbean). There are bank accounts in these countries and in Switzerland and somehow not all of these accounts allegedly made it onto Mr. Brockman’s annual Reports of Foreign Bank and Financial Accounts (the FBAR).

Mr. Brockman also allegedly filed false tax returns from 2012 – 2018, ignoring capital gains that were made in various transactions (detailed in the indictment). There are also counts of wire fraud, money laundering, and conspiracy. From the Department of Justice press release:

According to the indictment, Brockman, a resident of Houston, Texas, and Pitkin County, Colorado, used a web of offshore entities based in Bermuda and Nevis to hide from the IRS income earned on his investments in private equity funds which were managed by a San Francisco-based investment firm. As part of the alleged scheme, Brockman directed untaxed capital gains income to secret bank accounts in Bermuda and Switzerland. The indictment further alleges that to execute the fraud, between 1999 and 2019, Brockman took measures such as backdating records and using encrypted communications and code words to communicate with a co-conspirator, among other alleged actions.

In addition to the tax offenses, the indictment alleges that, between 2008 and 2010, Brockman engaged in a fraudulent scheme to obtain approximately $67.8 million in the software company’s debt securities. As CEO, Brockman was contractually restricted from purchasing any of the software company’s debt securities without prior notice, full disclosure, and amending the associated credit agreements. The indictment alleges that Brockman used a third-party to circumvent those requirements, to acquire the debt securities, and to conceal from the sellers valuable economic information. The indictment further alleges that Brockman used material, non-public information about the software company to make decisions about purchasing the debt. In addition, Brockman allegedly persuaded another individual to alter, destroy, and mutilate documents and computer evidence with the intent to impair the use of such evidence in a grand jury investigation.

Mr. Brockman has pleaded not guilty, and it should be remembered that these charges are just allegations.

It is clear from the indictment that at least one (probably two) individuals within Reynolds and Reynolds have cooperated with the Department of Justice. Additionally, Robert Smith, the CEO of Vista Equity Partners in San Francisco, admitted his part of the scheme and will be paying $139 million to the United States and will avoid prosecution.

The total alleged fraud is $2 billion.

There are numerous other interesting items within the indictment; here are just a few:

On or about June 3, 2007, BROCKMAN, using his encrypted email system, directed Individual One to purchase a computer program called “Evidence Eliminator” for Individual One’s computers…

On or about October 20, 2011, BROCKMAN, using his encrypted email system, directed Individual One to attend a money laundering conference “if possible under an assumed identity.”…

On or about December 9, 2012, BROCKMAN, using his encrypted email system, directed Individual One to change the scture in which the shares of Point were held, moving them to a “purpose trust” with a “dressed up charitable purpose” to avoid inquiries from banks and “the house” about the ultimate beneficial owners of Point.

Again, an indictment does not mean Mr. Brockman is guilty of the alleged offenses. However, the indictment shows a picture of deliberate disregard of US taxes. Mr. Brockman is facing many, many years and large financial penalties if found guilty of the 39 counts for which he faces trial.

And that’s a wrap on 2020, a dismal year that I hope we don’t have to experience ever again. May all of you have a Happy, Healthy, and Safe New Year.

Posted in International, IRS, Tax Fraud | Tagged | Comments Off on The 2020 Tax Offender of the Year

IRS Issues 2021 Standard Mileage Rates

Posted on December 31, 2020 by Russ

A week ago the IRS announced the 2021 standard mileage rates:

  • $0.56 per mile for business use (was $0.575 per mile in 2020);
  • $0.16 per mile for medical/moving (was $0.17 per mile in 2020); and
  • $0.14 per mile for service of charitable organizations (unchanged from 2020).

These rates (except for the charitable driving rate) come from a study that the IRS has conducted every year determining the costs of operating cars. The charitable mileage rate is set by statute. With gasoline and insurance costs down in 2020, the standard mileage rates fall for 2021.

Posted in IRS | Tagged | Comments Off on IRS Issues 2021 Standard Mileage Rates

This Deposit from “IRS 310” Is Your Stimulus Payment

Posted on December 31, 2020 by Russ

This morning, I found a very small deposit in my bank account; it was coded “IRS 310”. It’s the second stimulus payment, and it’s real. Kudos to the IRS for getting these out almost instantaneously with the signing of the legislation Sunday night.

Remember, your tax professional will need to know the amount of payment you received. In theory, you will get another letter in the mail noting this amount. Give that letter (and the previous letter) to your tax professional. The stimulus payments (technically, the Economic Recovery Payments) are advances on a refundable tax credit on your 2020 tax returns.

If you received less than the full amount you should have, you will be able to obtain the tax credit on your 2020 return. If you received more than you should have (let’s say your income increased in 2020), you do not have to pay the credit back.

Posted in IRS | Tagged | Comments Off on This Deposit from “IRS 310” Is Your Stimulus Payment

Expenses Associated with PPP Loans to be Fully Deductible

Posted on December 21, 2020 by Russ

According to this morning’s Wall Street Journal, businesses that took Paycheck Protection Plan (PPP) loans will be allowed to fully deduct expenses paid by the PPP loans. While a cap on the amount on this provision was originally inserted in the legislation, that cap was reportedly removed. Assuming this is accurate–the actual text of the legislation is not available as of this writing–this will be a big win for business owners who took PPP loans.

That’s not the only thing in the legislation, of course. There will be $600 stimulus payments, extension of unemployment and PUA benefits, and numerous other provisions. I’ll have more on this when the actual text is available.

Posted in IRS | Tagged | Comments Off on Expenses Associated with PPP Loans to be Fully Deductible

PPS Gets Friendlier: Callbacks Available

Posted on December 15, 2020 by Russ

Twice a week, on average, I call the IRS’s Practitioner Priority Service. It’s the usual starting place for tax professionals to resolve issues with the IRS. This year, calling the IRS has been an adventure. This is not the IRS’s fault: Covid has played havoc with everyone. But getting through to the IRS for tax professionals has been an adventure: If I call after 9am PST I’m usually greeted by the message, “Due to extremely high call volumes we cannot complete your call at this time; please call back later. Goodbye.”

This morning, I called the IRS to resolve a client’s payment. He made a payment for 2019 taxes–and it shows on the IRS computer system. However, it has not made it to the client’s account; somehow the payment is stuck in limbo. When I called the IRS up I was greeted with something new and improved (really, this isn’t a joke):

We estimate your wait time to be between 15 and 30 minutes.

Rather than waiting on hold, we can call you back when it’s your turn. You will not lose your place in the queue. To receive a callback, press….

After entering my callback number (it does require a direct phone number), I was told I would receive a callback in 20 minutes…and I did! This is a marked improvement, and I’m surprised the IRS hasn’t publicized it.

Additionally, I’ve been told the ability to receive callbacks has been added to the IRS’s Identity Protection Unit. This year, the IRS has sent out 25% more letters requiring individuals to prove their identity while staff has been cut. Getting through to that number has been extremely difficult. Callbacks make the identity verification process a little easier.

All-in-all, kudos to the IRS for adding some technology that helps users.

Posted in IRS | Tagged | Comments Off on PPS Gets Friendlier: Callbacks Available

Ignoring W-2Gs and $482,000 of Income Led to a Sub-Optimal Result

Posted on December 14, 2020 by Russ

Bluffing in poker can work quite well. However, if your opponent will always call, bluffing cannot work. One poker player learned that the IRS always call your bluffs (especially when they have evidence).

Guy Smith owns an interior construction business in Connecticut. He also enjoys playing poker, and had some success. With that success comes W-2Gs: They’re issued if you have a cash of $5,000 or more (net of the buy-in). Mr. Smith has had many, winning a poker tournament in Connecticut and finishing fifth in another in Florida.

Mr. Smith apparently didn’t tell his tax professional about those winnings. The IRS computer would, of course, send notices noting the discrepancies on the returns. Given the tournament winnings were more than $1 million, this is a big issue. Ignoring tax forms that are sent to the IRS has about a 0% chance of long-term success.

But like a bid informercial, that’s not all. Mr. Smith ignored $482,000 of income from his business (and didn’t tell his tax professional about that, either). Unfortunately for Mr. Smith, the IRS discovered this. With nearly $1.5 Million of unreported income and over $800,000 of unpaid federal income taxes, IRS criminal investigation was interested.

Mr. Smith pleaded guilty to one count of tax evasion last week; he is scheduled to be sentenced in March and faces up to five years at ClubFed. Given he has agreed to cooperate with the IRS and pay all outstanding taxes (and the penalties and interest), his actual sentence will likely be far less.

In just over two weeks I’ll be announcing this year’s winner of the “Tax Offender of the Year” award. To win this coveted award [1] it takes more than simply evading taxes. It has to be special; it really needs to be a Bozo-like action or actions. If you have any ‘deserving’ nominees, let me know.

[1] I’m not sure anyone really covets receiving this award, but given the actions of some of the previous winners it may be that some were actually trying to win the award.

Posted in Connecticut, Gambling, Tax Evasion | Comments Off on Ignoring W-2Gs and $482,000 of Income Led to a Sub-Optimal Result

Tax Professionals: IRS Considering Extending 2021 Tax Season

Posted on December 6, 2020 by Russ

Last week, a client of mine who filed in late March (by paper because her return could not be electronically filed) finally received her refund. The return was processed in mid-November (per the IRS transcript). The IRS is doing its best with Covid, but they remain ridiculously behind. It’s certain the IRS will not process all timely paper-filed 2019 returns by the end of this year. Indeed, I saw that a Revenue Agent told a fellow E.A. that the IRS has “at least 2.5 million unopened pieces of mail.”

Another fellow Enrolled Agent attended (virtually) the IRS Stakeholder Liaison IMRS meeting last week. That’s a meeting where the Stakeholder Liaisons–IRS employees tasked with assisting tax professionals–track and respondsto significant national and local issues and concerns on IRS policies and procedures. During that call the IRS discussed extending the 2021 tax season by extending the filing deadlines for various 2020 tax returns.

The IRS has various concerns:

  1. 1099s and W-2s may be delayed.
  2. The IRS may not be caught up by the beginning of the 2021 Tax Season.
  3. A 2-week quarantine by an employee would be difficult to overcome.
  4. Many tax professionals will be working from home.
  5. Clients will expect less contact with tax professionals which likely will increase the time needed to prepare returns.

The IRS is requesting that tax professionals contact their local stakeholder liaison express their opinion.

I will be pondering this over the next week as I have both pro and con opinions regarding extending the 2021 Tax Season. And I still have two timely returns to get completed for the 2020 Tax Season (two individuals residing outside the United States who took second extensions)!

Posted in IRS | Tagged | Comments Off on Tax Professionals: IRS Considering Extending 2021 Tax Season

Gambling With an Edge Podcast

Posted on November 30, 2020 by Russ

I was this week’s guest on the Gambling With an Edge podcast where we talk about taxes (with an emphasis on gambling). You can download the podcast here; it’s also available on iTunes and all the other usual podcast locations.

We spoke about changes in the tax law, self-employment tax for professional gamblers, self-dealing vis-a-vis IRAs, 529 plans, and offshore (foreign) corporations among other issues. I also gave a non-tax recommendation on my favorite Thai restaurant here in Las Vegas.

Posted in Taxable Talk | Tagged | Comments Off on Gambling With an Edge Podcast